I’d Like You to Meet “Cortana” My Artificial Intelligence

Cortana can search the Internet, set up reminders, shift calendar appointments, manage your mishmash of meetings, find restaurants, send text messages, and place phone calls. And, as good as she is right now, Cortana only seems to get better the more that I deal with her. The longer we work together, the more she seems to understand my habits and anticipate my needs.

She never complains.

And she never takes the day off.

In short, I can only say that Cortana is the best personal assistant I’ve ever had.

Personal digital assistant, that is …

Based on a 26th-century artificial intelligence (AI) character in the smash hit Halo videogame series, Cortana made her grand entrance as part of Windows Phone 8.1 – the key new update for Microsoft’s mobile operating system (OS).

After more than two years in development, she arrives at a crucial juncture for Microsoft. In fact, one analyst recently wrote that “Microsoft’s bold new mobile efforts rest on [Cortana's] virtual shoulders.”

Truth be told, Microsoft is secretly hoping that the prim and efficient Cortana manifests her latent “dark side.”

You see, the folks in Redmond really want Cortana to become a “Siri Killer.”

But we just want her to point us to the next “killer app” – because we can cash in.

Indeed, we will cash in.

And Cortana and I will now show you how …

A Message From Microsoft

Most “smartphones” today come with voice-recognition software. That’s what Cortana is, you know – voice-recognition software: You speak a question into your phone and have the results come back to you via the wireless Web.

Although she’s a laggard in terms of her late arrival to market, Microsoft says Cortana will only get better with time because she will learn your habits and begin to anticipate your needs.

Whether that happens or not, I believe Microsoft’s decision to enter the voice recognition field means this technology has now passed the so-called “tipping point.” By that I mean it’s no longer just a cool “nice-to-have” feature – it’s an integral part of personal computing.

And Microsoft believes Cortana can advance a tech platform that will change the way we interact with our mobile devices, our cars… and even our homes.

Because we understand this, we have an advantage. We’ve identified a small-cap leader that plays a key role in just about every aspect of voice-recognition technology.

A New Market

As you can probably tell, I’m big believer in voice recognition. I use it all the time to send text messages to my wife and kids. Ditto when I want to quickly reply to an email on my iPhone.

Not only that, but I also use it my Acura MDX almost daily. When I want to make a call or set my navigation system to a new address, I just push a button and talk to the friendly female voice assistant.

I got immersed in “voice-rec” technology with the introduction of the Apple iPhone 4S back in the fall of 2011. That’s the smartphone Apple used to launch Siri (hence, the “4S” designation) – the first voice bot truly designed for the masses.

The market has grown from there. Google Inc. (NasdaqGS: GOOG) offers a digital voice assistant for mobile phones running its Android operating system through its “Google Now” service. And now Microsoft has entered the fray.

And while each of these three giants has strong entries in the voice-recognition market, none is the kind of “pure play” that offers maximum profit opportunities.

That’s why I think investors would do well to take a look at Nuance Communications Inc. (NasdaqGS: NUAN).

This small-cap leader made its name as the technology behind Apple’s Siri. But the firm’s science, engineering, and market understanding run much deeper than that.

In fact, the company actually traces its roots back to two legendary tech pioneers. The first is Ray Kurzweil, the noted futurist and author, who founded an optical-character-recognition (OCR) firm back in 1974.

The second is SRI International, a spinoff of Stanford University. In 1994, the forerunner of Nuance was itself spun off from SRI to commercialize speech-recognition technology originally developed for the U.S. government.

What followed was a series of complex mergers and acquisitions that in 2005 created the current Nuance Communications.

Let’s take a closer look at this important player.

The Nuance File

Today, Nuance is a thriving multinational software company specializing in both voice recognition and imaging technology. It has about 4,000 patents covering all aspects of both tech fields.

Nuance services a dozen industries, including mobile, automotive, legal and medical. The company has more than 1,200 speech scientists. No wonder it has a voice assistant that speaks 38 languages: The company works with more than 2,000 global partners.

Some analysts have suggested dark days are ahead for Nuance because Apple has recently shown an interest in moving voice tech in house. And it’s true that Apple recently purchased Novauris Technologies for an undisclosed sum. Apple hasn’t commented, but the trade press says Apple bought Novauris specifically to beef up Siri.

However, that doesn’t necessarily mean Apple will end its relationship with Nuance. After all, Novauris itself was a spin-off of Dragon Systems, a voice tech firm owned by – Nuance.

But let’s just assume that Apple and Nuance stop working together. I don’t think that spells disaster for Nuance. Far from it.

Nuance has developed an advanced Cloud-based artificial intelligence app dubbed Project Wintermute. Not only does it work on smartphones, it also works with smart TVs and other Web-connected devices.

In a test of Wintermute’s capabilities last summer, Forbes said the software could seamlessly tell users how many points their favorite basketball player scored, or even show a game on TV based on a user’s viewing patterns and a simple dictation such as “Throw on the game.”

But Nuance isn’t banking solely on the success of Wintermute. The company simply plays too big a part in the global tech ecosystem to let the loss of one customer, even a prestigious one, hold it back.

Consider that Nuance is already an automotive powerhouse…

Nuance’s Dragon Drive is an innovative voice recognition platform that is becoming a key part of today’s tech-centric automobiles.

Dragon Drive allows users to sync destinations and other valuable data from their mobile devices that can be activated via voice commands while driving.

A motorist using the software also can seamlessly transition from getting GPS directions, to sending an e-mail, to posting on social media – all through Dragon Drive built into the dashboard.

This explains why it already works with Detroit’s Big 3 automakers. as well as such foreign nameplates as Hyundai Motor Co. (OTC: HYMTF).

All told, Nuance has placed its speech technologies in more than 90 million automobiles.

Nuance sets the standard for medical voice recognition, a field that accounts for about half its sales.

During this year’s first quarter alone, Nuance signed 12 new healthcare clients. It also expanded its longstanding relationship with the U.S. Department of Veterans Affairs, which has roughly 9 million vets receiving health services.

Nuance also has scored with its Dragon Medical 360, a software package that provides essential documentation solutions to more than 300,000 physicians. It allows doctors to orally fill out patient forms for electronic records and is intuitive enough to make corrections based on stored patient data.

Lawyers also use voice recognition like Nuance’s Dragon NaturallySpeaking. The software helps them prepare documents for court and perform data entry – all by spoken command.

And consumers turn to Nuance for products like Voice Control 2.0 and Dragon mobile apps to dictate various commands throughout their day.

At a recent price of $16.25, Nuance has a market value of about $5 billion. The stock is trading at a forward Price/Earnings (P/E) ratio of about 13, a discount of nearly 40% from the 18 multiple of the Nasdaq 100.

Yes, the company needs to improve its financials. It has continued growing sales over the last several quarters, but is losing money. In this year’s first quarter, Nuance posted a net loss of $55.4 million on sales of $470 million.

But this is a “special-situation” play with plenty of upside.

Nuance’s share price zoomed steeply in late 2011 and early 2012 on speculation that Apple would buy the power behind Siri. When that didn’t happen, the stock sold off from high it had reached at roughly $30 a share.

So if the stock could just return to its two-year high, we’d be looking at a double from here.

No wonder billionaire investor Carl Icahn has increasedhis stake in the company. According to MarketWatch,he recently added nearly 1 million shares to his stake, bringing his total Nuance holding to 60.8 million shares.

Last August, the company adopted a “poison pill” to block a hostile takeover. But Icahn still bought more stock.

Icahn is normally quite chatty about his holdings. But he’s had nothing to say about his Nuance investments.

This much is clear: This is an opportunity to invest in a firm that offers the broadest portfolio of technology in the growing sector of voice recognition. And we believe you’d be doing so at a discount price level.

As such, it belongs in the high-risk portion of your portfolio.

But investors who are patient enough to watch the company rebuild its finances over the next few quarters could be richly rewarded.

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